East-West box demand growth to slow next year

Date: Tuesday, December 18, 2018Source: Lloyd's Loading List

Demand growth on Asia-Europe and transpacific headhaul ocean carrier services will slow next year, weakening spot rates in the first quarter of 2019 after February’s Chinese New Year holidays, according to analysts.

Although rates on the Shanghai Containerized Freight Index for Shanghai to Europe (base port) services increased to $832 per teu on 14 December, from $774 per teu a week earlier, according to Maritime Strategies International, headhaul volume growth of around 5% in October on Asia-Europe services will fall to 2-3% growth over the next six months.

The analyst said this would be due to the “sluggish” economic climate in the Eurozone where the most recent Purchasing Managers Index (PMI) data pointed to the weakest pace of expansion in four years.

“The UK, the region’s largest importer, (also) faces further Brexit-related uncertainty and signs of strain in the retail sector − a profit warning from online fashion retailer ASOS has focused minds this week,” said MSI.

“Lower oil prices will offset this to a degree, but while we continue to expect the consumer spending power backdrop to be more favourable next year, the recent run of poor economic data has led us to question our relatively positive demand forecast for 2019.”

As a result, MSI said on the Asia-Europe headhaul trade “we expect spot rates of around $740 per teu in February, and recovery to around $840/TEU by May”.

On the transpacific, pricing usually picks up in mid-December as importers look to replenish post-Christmas. However, most lines have now cancelled planned mid-month General Rate Increases because, due to the US-China tariff war − which has prompted major frontloading in recent months − many importers are reported to be overstocked.

“The US-China trade war, not seasonality, is currently driving Transpacific prices,” said Philip von Mecklenburg-Blumenthal, VP of FBX at Freightos. “I don’t envy procurement managers right now. Should they be using this time to make some hard sourcing decisions? Changing suppliers is always fraught with risk, let alone moving production to another country.”

With some analysts now forecasting a contraction in demand on the transpacific in 2019, MSI said the US-China tariff war and 90-day truce had greatly complicated the outlook and much would depend on whether shippers expected the two sides to reach an agreement before 1 March.

“We are sceptical that the US and China will reach a wider trade deal before March 1st, although there appears to be more goodwill than normal, and it is possible that an extension to the truce could be agreed,” said the analyst.

If a deal seems unlikely, renewed frontloading would bolster volumes on the trade in January, but the volumes already brought forward would limit the extent of this upside, according to MSI.

Mecklenburg-Blumenthal said transpacific rate volatility would likely increase at least until Chinese New Year in February. “With the uncertainty in tariffs, companies with agile supply chains have already prepared to move production to other locations and may now play with the timing,” he said. “Those with less flexibility in sourcing will play with stock levels.

“Carriers, who don’t have the capacity to react to sudden changes in demand, are now worried that if the tariff trade war escalates again, that they will be facing surplus capacity and plunging prices.”

MSI noted that an early Chinese New Year in 2019 would further complicate forecasts through the first quarter, particularly on the transpacific. The holiday will fall on 5 February, 11 days earlier than in 2018. This will bring the pre-holiday rush of orders forward ahead of factory closures, translating into a relatively strong January but weaker February and also narrowing the window in which shipments can reach the US prior to 1 March.

“Given this combination of factors we expect relatively weak markets in February, with further downside in Q2 if tariff rates rise to 25% in March,” said MSI.

On a monthly-average basis November saw improvement in both the Asia-Europe and transpacific freight markets. “Recent weeks have seen continued improvement on the Asia-Europe trade lanes but an expected correction in transpacific spot rates,” added MSI.

“At present Asia-Europe spot rates sit at around $830 per teu. Asia-US West Coast spot rates have fallen beneath $2,000 per feu and Asia-US East Coast beneath $3,000 per feu.

“All three trade lanes are in a stronger position than the equivalent point in 2017 − Asia-Europe spot rates are up around 13% year-on-year with a much stronger performance in the Med than North Europe, while the two transpacific trades are up 50-60% year-on-year.”